Pages

10/14/2011

A Question of Efficiency

One topic from the course textbook that I wanted to better understand was that of economic efficiency. The textbook lists three requirements for achieving economic efficiency, which are "1. All users achieve the same marginal benefit, 2. all suppliers operate at the same marginal cost, 3. every user's marginal benefit is equal to every supplier's marginal cost (pg. 145)." When i set out to find a current example that would help explain economic efficiency, I found an article written by Matthew Saltmarsh of the New York Times, titled "Britian Considers a New Kind of Stimulus-Higher Speed Limits (http://www.nytimes.com/2011/10/01/business/global/britain-considers-a-new-kind-of-stimulus-higher-speed-limits.html)."The title of the article more than hints at what the article is about; the British government is considering raising the speed limit from 70mph (113 k.p.h.) to 80 mph (130 k.p.h.) in order to "improve economic efficiency and personal satisfactionby shaving valuable minutes from some journeys." I suppose that the improved economic efficiency would be from users (citizens) spending more time at work, spending money, etc., pretty much something more productive than driving in a car. However, when we consider the definition of economic efficiency offered us by Ivan Png and Dale Lehman, we discover significant flaws in Britian's plan. Let us first consider the increased costs of the increased speed limit, some of which are mentioned in the article. Increased costs would come in the form of more oil consumption and fuel emissions, increased risks of car accidents leading to an increase in medical expenses, insurance costs, and wages/salaries paid to paramedics and police officers, costs to study the effects of the increased speed limit, quicker depreciation in the value of vehicles, just to name a few. The benefits, however, are far fewer in number. Benefits might include, less stress (no one enjoys sitting in traffic), more free time for users to provide some sort of benefit to society, and possibly even an increased involvement/investment into cleaner modes of transportation.It appears to me that this, more than anything, is about political motives that it is about economic efficiency. The marginal costs clearly outweight the benefits and the proposed speed limit increase, while may in fact be an ok idea, will in no way improve economic efficiency.

1 comment:

And, taking Mitchell's cons at face value, I think he's undervalued the pros. An undervalued cost of travel is the opportunity cost of our own time. Taking the IRS cost per mile as a good approximation, at 70 miles per hour, driving costs about $35 per hour. That's what someone who makes $70K per year makes. Another way of thinking about this is that for someone who makes that much, the cost of their time is over half of the cost of the trip. To the extent that this policy actually allows people to reduce their time by 10-15%, it could be beneficial.

But, I don't know that the standard definition of efficiency given by Png and Lehman applies here. That definition applies to how to evaluate transactions made voluntarily. In the case of the speed limit policy, who is the demander? Who is the supplier? What are they exchanging? Without pinning those down, I don't think the definition applies.